Ezra Klein explains chained CPI

Posted by AzBlueMeanie:

If you don't want to take my word for it, then at least consider what Ezra Klein has to say about chained CPI. Here’s what chained-CPI really means: Up to $849 less for someone who retired in 2001:

Here are the facts. Chained-CPI does mean that Social Security
beneficiaries will see their benefits cut. Imagine a person born in 1936
who retired in 2001, at age 65. For simplicity, let’s assume they’re
eligible for the maximum benefit. Given that the cap was below $30,000 a
year as recently as 1980, it’s not inconceivable that a middle or
upper-middle class person with steadily increasing earnings since 1958
would be in this situation.

Their initial benefit
would have been $1,538 a month, or $18,456 a year. Under existing law,
they would have gotten a series of cost-of-living adjustments (COLAs).
By 2013, COLAs
would have increased this person’s annual benefit to $24,689.49.
However, under chained CPI, it would be $23,820.19, a decrease of
$869.30. That’s a 3.5 percent cut in benefits. And, of course, a 3.5
percent cut in income matters a lot more when you’re barely clearing
$20,000 a year than it does when you’re making a regular middle-class
salary.

There would be other complications as well. Kenneth Stewart, an
economist in the Division of Consumer Prices and Price Indexes at the
Bureau of Labor Statistics (BLS), is one of the guys who computes the
various CPIs every month. He notes that one benefit of CPI-W and other
unchained CPIs is that they are final upon issuance. That is, the
numbers are never revised.

* * *

Not so for chained CPI. “The chained CPI-U is subject to revision
because we don’t get the actual expenditure data until 1 or 2 years
later,” he notes. For example, in 2005
we had access to final chained CPI data for 2003, and only interim data
for 2004. If we were to adopt chained CPI, we’d either have to use
incomplete data, or else wait until we had final data to implement
COLAs, which would further compound the cuts. The former, of course,
would reduce the accuracy of the measure, a feature that proponents
often tout.

For that reason, critics of chained CPI have sometimes promoted the
CPI-E, an experimental index meant to measure price changes within
products bought by the elderly. Because it’s experimental and simply a
result of reweighing the existing CPI measures to more heavily account
for goods like housing and health care, the BLS doesn’t publish the data
on its website, but it’s available upon request. Stewart, who helped develop CPI-E, explains that it’s an unchained measure, and because of that its numbers don’t need to be revised.

In the mid-2000s, the housing bubble and boom in health-care prices
meant that CPI-E, which weights both more heavily, rose faster than
conventional inflation measures. In 2008, for instance, adopting CPI-E
as Social Security’s inflation measure would have given our hypothetical
retiree $327.88 more a year. However, since the housing bubble burst
and health-care prices started slowing in growth, that effect has
diminished. “Medical care inflation has been relatively subdued,”
Stewart says. “Shelter prices have also been very tame in, really, the
last seven or eight years.” As a result, in 2013 CPI-E would have
resulted in only $56 in additional annual benefits for our test retiree.

The measure is not without its disadvantages. The biggest, noted by
the Committee for a Responsible Federal Budget’s Adam Rosenberg and Marc
Goldwein here,
is that a third of Social Security beneficiaries are not elderly. If
the goal is to accurately represent inflation for beneficiaries, you’d
also have to look at spending patterns among survivors and the disabled,
which would be a considerable new project. Also, CPI-E uses a small
sample size as it relies on the same sample that normal CPI does. To
bring it from the experimental phase to become ready for prime time,
that’d need to change. “We’d have to do a lot of research as to where
those folks are shopping, what exactly they’re buying, and what prices
they’re paying,” Stewart says. “It’s very difficult and costly to
measure.”